Capital Markets

Four reasons, usually in combination. To push out maturities so there is no wall coming due. To cut the interest cost when rates or the credit have improved. To loosen covenants or other terms constraining the business. And to change the mix, for example replacing secured bank debt with bonds to free up collateral. Most refinancings are really about buying time and flexibility rather than saving money.

• Extend maturities and avoid a near term maturity wall
• Lower the coupon if rates or the credit have improved
• Loosen covenants or other restrictive terms
• Change the mix of instruments and free up collateral
• Weigh the saving against call premiums and new issue fees

Whether you mention the cost side. A refinancing that saves fifty basis points but triggers a large call premium may not be worth doing.

Commercial paper is short term unsecured debt, issued for under 270 days and often for just a few weeks, bought mostly by money market funds. Only strong investment grade issuers can access it. Companies use it because it is the cheapest funding available and it flexes with working capital swings. The catch is refinancing risk: it has to be rolled constantly, so issuers back it with a committed revolver.

• Short term unsecured debt, typically under 270 days
• Bought largely by money market funds, so only strong IG issuers qualify
• Cheapest funding source, used for working capital and bridging
• Must be rolled continuously, which creates refinancing risk
• Backstopped by a committed revolver in case the market shuts

Whether you name the revolver backstop. That link is the reason investment grade companies keep large undrawn revolvers.

Debt is borrowed money you contractually must repay with interest, ranking ahead of equity in a bankruptcy. Equity is ownership sold in exchange for cash, with no repayment obligation but permanent dilution. Debt is cheaper because interest is tax deductible and the lender takes less risk, but it adds fixed obligations that do not care how the year went.

• Debt is a contractual claim, equity is a residual claim
• Debt ranks senior in bankruptcy, equity is last
• Interest is tax deductible, dividends are not
• Debt is cheaper but adds fixed obligations and covenants
• Equity has no repayment but dilutes existing owners permanently

Whether you can explain why debt is cheaper rather than just asserting it. The answer is the tax shield plus lower risk to the provider.

In a direct listing existing shares simply start trading on an exchange. There is no underwriter buying and reselling stock, no traditional bookbuild, and classically no new money raised, so no dilution and no underwriting discount. The opening price is set by an auction against a reference price rather than negotiated with investors. It suits a well known company that does not need cash. The trade-off is no cornerstone book and no price support.

• Existing shares list directly, no underwritten primary raise in the classic form
• No bookbuild: price is discovered in an opening auction
• No underwriting discount and typically no lock-up
• No dilution because no new shares are issued
• Suits well known companies that do not need the proceeds
• Gives up the cornerstone book, the greenshoe and price stabilization

Whether you frame it as a trade-off rather than as a cheaper IPO. What the company gives up is the interesting half.

Preferred stock is an equity instrument that behaves like debt. It pays a fixed dividend and ranks ahead of common equity on distributions and in liquidation, but sits behind all debt. Unlike interest, the dividend can usually be deferred without triggering a default, and preferred normally carries no vote. That mix is why rating agencies treat part of it as equity, which is generally the reason issuers use it.

• Ranks above common equity and below all debt
• Pays a fixed dividend, often cumulative if deferred
• Deferring a dividend is not an event of default
• Usually carries no voting rights
• Agencies give partial equity credit, which is the main attraction

Whether you name the equity credit. That is the practical reason a company issues preferred rather than simply borrowing more.

In the primary market the company itself issues new securities and receives the proceeds, as in an IPO or a follow-on offering. In the secondary market investors trade existing securities with each other and the company receives nothing. Day to day stock trading is entirely secondary, which is why a share price move does not directly give or take cash from the company.

• Primary: new issuance, proceeds go to the company
• Secondary: investors trade existing securities among themselves
• The company receives nothing from secondary trading
• IPOs and follow-ons are primary, though they can include secondary shares
• Share price still matters, it sets the cost of any future issuance

Whether you can explain why a falling share price still hurts a company even though no cash moves.

An initial public offering is the first sale of a company's shares to public investors, after which the stock trades on an exchange. Companies do it to raise primary capital for growth, to give existing shareholders and employees a liquid market to sell into, and to get a publicly quoted currency they can use for acquisitions. The costs are disclosure obligations, quarterly scrutiny and a meaningful underwriting fee.

• First public sale, creates a listed market in the shares
• Primary proceeds fund the company, secondary proceeds pay selling holders
• Liquidity for founders, early investors and employees
• Creates acquisition currency and a public valuation benchmark
• Costs: disclosure, quarterly pressure, underwriting fees, lock-up

Whether you separate primary from secondary proceeds. Many candidates assume all the money goes to the company.

The credit spread is the extra yield a borrower pays over a risk free benchmark of the same maturity, and it is the market price of default risk. It moves for two reasons. Fundamentals: expected default rates, earnings and leverage. And technicals: fund flows, how much money is chasing yield, and how much new supply the market has to absorb. In stress, technicals usually move spreads faster than fundamentals do.

• Yield over a matched maturity risk free benchmark
• Compensation for expected default and expected recovery
• Fundamental drivers: default expectations, leverage, earnings trends
• Technical drivers: fund flows, new issue supply, risk appetite
• Spreads gap widest when technicals turn, not when fundamentals do

Whether you separate fundamentals from technicals. It is the framing credit investors actually use day to day.

The greenshoe is an over allotment option, typically up to fifteen percent of the deal, letting underwriters sell more shares than the company originally offered. They do it by going short. If the stock trades up, they exercise the option and cover at the issue price. If it trades down, they buy shares in the market instead, which supports the price. It is a stabilization mechanism that costs the issuer nothing.

• An over allotment option, usually up to fifteen percent of the base deal
• Underwriters oversell and run a short position into the aftermarket
• Stock up: exercise the shoe and cover at the issue price
• Stock down: buy in the market, which supports the price
• Either way the short is covered, so the bank takes no directional bet

Whether you can explain the short position. Candidates describe the shoe as extra shares and miss that it is a hedged stabilization tool.

It means short-dated government bonds yield more than long-dated ones, which is the reverse of normal. It implies markets expect rates to fall, which usually means they expect economic weakness ahead. It gets watched because inversion has preceded most recent US recessions, though with long and variable lags, and it directly pressures bank profitability since banks borrow short and lend long.

• Short rates above long rates, the reverse of normal
• Implies the market expects rate cuts, therefore weakness
• Has preceded most recent US recessions
• The lag is long and variable, so it is not a timing tool
• Compresses bank net interest margins directly

Whether you can explain the mechanism rather than just repeating that inversion predicts recessions.

Secured debt has a claim on specific collateral, so in a default the lender can take those assets before anyone else is paid. Unsecured debt has only a general claim on the company. Because expected recovery is much higher for secured lenders, they accept a lower interest rate. The price difference between the two tranches is essentially the market pricing the difference in expected recovery.

• Secured has a lien on specific assets, unsecured has a general claim
• Secured lenders recover first and recover more
• Higher expected recovery means a lower required rate
• The spread between them prices the recovery difference
• Priming existing secured lenders normally requires their consent

Whether you connect price to expected recovery rather than just asserting secured is cheaper.

Agencies look at business risk and financial risk together. On the business side: scale, market position, diversification and how cyclical the end markets are. On the financial side: leverage measured as debt to EBITDA, interest coverage, free cash flow, liquidity and the maturity profile. Then financial policy, which is why a sponsor-owned company rarely gets investment grade. The line is BBB minus, and crossing it changes both your cost of debt and who can buy it.

• Business risk: scale, market position, diversification, cyclicality
• Financial risk: leverage, interest coverage, cash flow, liquidity
• Maturity profile and refinancing risk
• Financial policy and ownership, including sponsor control
• BBB minus or Baa3 is the investment grade boundary
• The rating sets pricing and determines the eligible investor base

Whether you mention financial policy, not just the ratios. Two companies with identical metrics can be rated differently on intent.

Mostly CLOs, which take roughly two thirds of the market, alongside loan mutual funds, hedge funds and the banks that arranged the deal. That buyer base shapes the product. CLOs want floating rate paper rated single B or better, so loans price off a benchmark rate, sit senior secured, and are structured to fit rating agency tests. A deal that falls outside what CLOs can hold prices much wider, or does not clear at all.

• CLOs are the dominant buyer, roughly two thirds of the market
• Loan funds, hedge funds and the arranging banks take the rest
• CLOs want floating rate, senior secured, single B or better paper
• Ratings and structure are built to fit what CLOs are allowed to hold
• A deal outside that box prices materially wider or fails to clear

Whether you connect the buyer base to the product design. Naming buyers is easy, explaining why loans look the way they do is the point.

PIK means payment in kind: instead of paying interest in cash, the borrower adds it to the principal balance, so the debt compounds. Borrowers use it when cash is scarce and they want to protect liquidity, typically on junior tranches, holdco notes, or in a restructuring. The trade is a materially higher rate, often several hundred basis points above cash pay, and a much larger balance at maturity.

• Interest accrues to principal rather than being paid in cash
• Preserves near term liquidity, common on junior and holdco debt
• Priced several hundred basis points above the cash pay alternative
• The balance compounds, so the repayment at maturity is much larger
• PIK toggles let the borrower switch between the two, at a rate penalty

Whether you name the cost. Candidates describe PIK as free cash flow relief and forget that it is expensive and compounding.